Friday, 25 May 2012

Could Mobile Banking be the innovative answer to the microfinance conundrum?

﻿﻿The numbers are not conclusive but general web-consensus puts worldwide mobile phone usage at the end of 2011 at 5.6 billion. A number driven up significantly by developing giants China (>1bn) and India (>900m) but numbers are also growing in smaller developing countries like the Philippines (86m), Ecuador (15.9m) and Benin (1.6m). In fact, a Guardian piece found that two thirds of the mobile phones in use in 2009 were being used by people from developing countries.

﻿The mobile phone boom is perhaps not that surprising since it is so visually evident. However, what is less evident and more of a recent revolution in terms of mobile technology is that mobile phones are now being used, on a large scale, to extend financial services to the poor. As electronics companies battle it out in ‘developed’ countries to provide mobile phones that function more and more like mini computers; across Asia, Africa and Latin America, where there are approximately one billion people who do not have a bank account but do have a mobile phone (according to a CGAP/GSMA study (CNN)), mobile phones are being utilised to enable the ‘un-banked’ to perform basic financial transactions such as making payments, receiving credit and sending remittances.

If mobile banking reaches a greater potential (i.e. reaching the approximate one billion who have a phone but not a bank account) it could completely transform microfinance. Which is why, as a curious mind working in microfinance, I wanted to take a closer look at what is mobile banking? Why and how is it being adopted? And how may it transform the way people access financial services?

What is mobile banking (M-Banking)?

Mobile banking is a way to perform banking transactions using a mobile device like a mobile phone. By downloading or registering a mobile banking account onto their phone, M-Banking customers can send money, make payments and receive loansvia SMS. Although M-Banking is predominantly used by its customers to make payments (Mobile Payments); cash deposits and withdrawals are also provided by some operators who train and accredit local M-Banking ‘agents’ – a local shopkeeper or a local microfinance officer for instance – to offer these extended services (full Mobile Banking). Mobile operators are working in partnership with other sectors (be it the formal financial sector or NGO/non-profit sector) to effectively create cashless economies in rural and poor areas by giving the people who live there access to full-service banking using their mobile phones.

Why and how is M-Banking being adopted?

Just as access to financial services incorporates a variety of services and products for us, so it should for poor people. However, for many people who currently live outside the formal financial sector, one of the most basic services they are excluded from is somewhere safe to keep/save their money. Since the poor do not have access to bank accounts and a large number of microfinance institutions, who have NGO status, cannot accept deposits, billions of poor people do not have anywhere to safely deposit their money and are instead forced to carry all their money around with them or hide it under their pillows at night. Security is therefore one of the biggest advantages to mobile banking since it creates in effect a ‘mobile wallet’ that can only be accessed remotely with a secure PIN.

Another reason why so many people are adopting M-Banking is because it is a convenient way to complete day-to-day financial transactions. Instead of having to make the often arduous and time-consuming journey to a money transfer facility, a local bank or microfinance branch, M-Banking customers can send remittances at any time of the day and in an instant as well as receive and repay microloans simply by sending a text. Once the payment has been dispatched, all the recipient needs to do, if they so wish, is to convert their mobile payment into cash at a local M-Banking store.

Lendwithcare’s microfinance partner in the Philippines, SEEDFINANCE, has begun incorporating M-Banking into some of their local operations and its success and popularity so far illustrates how M-Banking allows microfinance institutions and clients to process transations more efficiently. Through itspartnership with SMART Communications and ENCASH, one of SEEDFINANCE’s partner financial institutions (FCCT) has now been accredited to issue Smart Money Cards to its microfinance clients. In a recent report, SEEDFINANCE said about FCCT that: “It has successfully generated 4,103 Smart Money applications of members who are currently utilizing the cards to receive loans, transfer funds to their loved ones, reload prepaid credits and manage the financial aspects of their business.” Clavel Aves, Area Manager of FCCT said “clients no longer need to spend time and money to physically visit the MFI office … Mobile banking is secure, it eliminates the worries and anxieties of clients from robbery and hold-ups and provides services affordably and conveniently.”

In Africa, where CARE has been cultivating a savings-led microfinance movement based on Village and Savings Loans Associations (VSLAs) since 1991, M-Banking has been at the heart of a mobile revolution there. When M-Pesa (a mobile phone payment service) was launched by Safaricom in Kenya five years ago, its growth and popularity spread rapidly with over 20,000 people registering with the service in the first month alone. Today 15 million Kenyans use M-Pesa to access financial services[1] and in neighbouring Tanzania five million people were registered M-Pesa’s users in 2010. Predominantly used by individuals to make money transfers, most often between urban migrant workers and rural dependents, M-Banking, with help from CARE, is being transformed in some areas to specifically meet the needs of VSLAs by creating group mobile accounts. Since savings collected by VSLA members is stored in a metal cash box, usually in the home of one group member, security is one of the main benefits of using M-Banking for VSLAs. In March this year CARE, Equity Bank and Orange launched an innovative partnership that connects VSLA groups in Kenya to full-service banking through their mobile phones. Through this partnership, VSLA groups are able to open Equity bank accounts and access services such as interest-bearing savings accounts, withdrawal and payment facilities without visiting a physical branch. Helene Gayle, president and CEO of CARE called this “a pioneering partnership that has potential to conveniently and affordably offer high quality retail financial services to millions of previously un-served people across Africa.”

Will M-Banking transform microfinance?

Well it seems in certain countries and in certain regions it already has. For example lendwithcare, through its partnership with SEEDFINANCE, is now funding microentrepreneurs like Henry Bordoquillo and Lemuel Quinones who use Smart Money cards to receive/pay loans and send remittances instead of visiting their local FCCT office. By increasing financial security and the ease with which microfinance clients can access and use financial services, M-Banking is not only providing customers access to a variety of formal financial services but also extending them into more remote and isolated areas – two aims that those of us working in microfinance hope to achieve. M-Banking is also of benefit to the microfinance institutions since transaction costs are reduced and rural penetration rates are improved. Indeed, M-Banking could be the innovative answer to the microfinance conundrum: how can we affordably expand microfinance to those that most need it – the poor and the isolated?

However, like all things designed to help the most vulnerable in our societies, these things need to be set-up and adopted with care. There have already been a number of challenges identified with M-Banking, most notably that mobile money agents are experiencing cash flow difficulties and both agents and customers complain that there is often not enough cash to meet their needs/demands. Cash management challenges that are even harder to overcome in more remote areas. Although popular, M-Banking facilities have not succeeded in reaching those most at need. Gautam Ivatury, manager of CGAP’s Technology Program said after publishing a report on the early experiences of mobile banking in 2008 that: “Globally, we estimate that fewer than one in ten mobile phone banking customers are poor, new to banking, or doing more than payments and transfers.”

It seems to me that trust is an important barrier that needs to be overcome if mobile banking’s potential is to be truly realised. And trust is something, quite rightly, that takes a while to achieve, especially when working in poor and vulnerable communities. However, the potential of mobile banking to transform microfinance in terms of its cost and outreach is exciting and I for one will most definitely be watching this space …